US Economy Struggles as QE2 is Set to Expire

By Michael Montgomery—Exclusive to Silver Investing News

The weak US dollar that lent support to silver prices yesterday was a nonfactor in today’s trading. Spot silver prices on the day were weak, ending the day down $1.65 to $36.82 per ounce. Economic concerns continue to weigh heavy on the minds of investors. These concerns center on the debt crisis in Europe and the US. Most analysts agree that the economic recovery is cooling off. Ahead of US economic data set to be released on June 3rd, all signs indicate that the data will be weak. Jobless claims, the hallmark of the economic recovery, increased by 10,000 to 424,000 in the week ended May 21, according to US Labor Department figures. As QE2 is set to expire at the end of the month the change in monetary policy and the effect on the US dollar, is at the forefront of investors’ minds.

In an exclusive interview with Silver Investing News, Josh Feinman, Global Chief Economist for DB Advisors sheds light on the upcoming economic data.

“On the whole, the data shows a notable loss of momentum. Some of the factors are temporary, such as weather issues, supply disruptions from Japan, and auto plant shutdowns. I do not think that all of it can be ascribed to these factors. The data reflects an economic recovery that is having trouble shifting into a higher gear,” stated Feinman. He added, “I don’t suggest that the economy is faltering, or about to rollover; it is having trouble sustaining the gains made last year.”

The weak economic recovery and loose monetary policy had been supporting the price of silver and gold as fears of inflation and a weak US dollar drove investors to safe haven assets. The recent corrections in the silver market have been largely attributed to margin requirements by the CME group. The lack of a robust recovery may bode well for silver. Many factors weighing down the economy may be transitory as Feinman stated, however, lingering problems from the recession are not going way.

“We are dealing with headwinds that have held the recovery back from the start. These are factors associated with the crisis; such as housing overhang, lingering credit restrain, hesitancy with household spending seeking to repair their balance sheets, and higher oil prices,” remarked Feinman.

Higher oil prices certainly weigh on consumer spending, which accounts for approximately 70 percent of the US economy. As oil prices tick lower, there is some hope that consumer spending may improve this summer. However, damage done by the recession is continuing to show as jobless claims remain high. This is currently the most troubling data for the US economy.

“One lesson that I have learned in my time is you must pay attention to jobless claims. If the claims have a break in the trend over a couple of weeks, ignore everything else; jobless claims tell you something. The numbers of claims don’t jump up like that for no reason.  I expect the next couple of reports will not look so good,” stated Feinman

While the economic data and the weak US dollar are supportive of precious metals, the expiration of QE2 may have an effect on silver prices. Loose monetary policy has been the main argument of silver and gold bulls. QE2 has pumped some $800 billion into monetary supply. While this inflow of currency will remain in the economy for some time as the easing measures end some of the ammunition for the bulls is taken away.

The main reason for the Fed’s decision to initiate QE2 was fears of deflation. “The fears of deflation have receded,” stated Feinman. With the threat of deflation reduced, the odds of a third round of quantitative easing are slim. Feinman reiterated, “If the economy is looking like its rolling over, the Fed would try to do something. I think the hurdle for a QE3 is pretty high; not insurmountable certainly, but I feel that the fed is going to sit tight for a while and see how things evolve.”

Analysts at JP Morgan and UBS agree that a third round of quantitative easing measures is very unlikely. Simply put, QE2 was ineffective and the political climate in Washington is not supportive of another round. However, if the economic recovery falters and jobless claims remain high, the Fed may look to act.

For silver and gold the ongoing issues in Europe and the US are supportive factors. Speculation on the strength of the US and world economies should continue to play into the strength of precious metals. Silver Eagle coin sales through to May had the highest sales figures since 1986, which show the demand for physical silver is still strong. The weak economic data, showing little sign of a robust recovery, continue to roll in and precious metals will continue to be sought as a safe haven by investors.